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Just for education purpose. Assuming I have some trading ideas that involves the use of OTC derivatives but I may not be able to put them into practice due to regulatory issues and huge minimum capital requirements.

Can I get the pricing(i.e the max return and max risk payoff) of a custom made derivative(might include an Asian, touch/no touch options, lookback et cetera) from a bank or an issuer even though trading those products are only available to H.N.W.I and professionals traders?

Thank you in advance for any help provided.

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    $\begingroup$ Sorry but I think the Bank will not want to spend time and effort discussing a complicated deal with someone who is not likely to become a customer. Their job is to make money and not to educate or inform the public. $\endgroup$
    – nbbo2
    Sep 24, 2021 at 14:27
  • $\begingroup$ Yeah that makes sense. True unfortunately. $\endgroup$
    – user59094
    Sep 24, 2021 at 15:26
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    $\begingroup$ Not quite duplicate, but this question quant.stackexchange.com/questions/65674 is related, and the anser is, you may gain some limited information from quotes on bespoke structures notes. $\endgroup$
    – Dimitri Vulis
    Sep 24, 2021 at 17:01
  • $\begingroup$ bespoke notes? Never heard of that would look at it. $\endgroup$
    – user59094
    Sep 24, 2021 at 18:00

2 Answers 2

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As @noob2 noted, nobody is going to quote you a price unless you're a customer. And when I say "customer", I mean "customer of the desk", not just of the bank. Would require an ISDA covering the specific product area + some commitment to minimum 'spend' with that business line.

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  • $\begingroup$ Yeah, I think some exchanges offer structured products(so can bypass the capital requirements) but exchanges are for standardized products(so can’t get a tailored product), so yeah nothing is free unfortunately. $\endgroup$
    – user59094
    Sep 24, 2021 at 18:10
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If you need this for educational purposes only, you can basically get all you need from reading papers. For example, Asian options are not always cheaper than their plain vanilla counterparts.

Risk or return details may be something for retail investors due to regulation like priips but no desk will usually provide this when you request a quote (RFQ).

If you would like to do it all by yourself, none of your products are particularly exotic. If you want to get an idea of pricing for educational purposes, you can start by looking at websites like investing.com where you can get implied vol quotes like shown in this question.

Once you have IVOL, you can get reliable prices for many products fairly easily with existing online tools. E.g. this question discusses touch option pricing in quantlib. Even more complex double no touch options have static replications as Uwe Wystup points out in his mathfinance newsletter.

The CME group offers listed Average price options. That is another terminology for Asian options. On top of that, it is relatively simply to price Asian options.

Turnbull, S. M., and L. M. Wakeman (1991): “A Quick Algorithm for
Pricing European Average Options,” Journal of Financial and Quantitative
Analysis, 26, 377–389

is one such solution. Another one is Krekel 2003. There is also

M. Curran, Valuing Asian and Portfolio Options by Conditioning on the Geometric Mean Price,
Management Science 40 (1994), 1705.

Matlab has an implementation for the Turnball Wakeman method. Quantlib is discussed here for example. I suppose other platforms / languages will have similar pricers as well.

You can also get a fairly reliable result with simple Monte Carlo simulations. For example, you can model commodity options using the following dynamic:

$$\frac{dS(t)}{S(t)} =\bigg(r \ - \ y - \frac{\sigma^2}{2}\bigg)dt + \sigma d\hat{W_{t}}$$

Integrating this equation between $t=0$ and the end $t=1$ provides the generic equation used in many Monte Carlo simulations:

$$ S(t_{1}) = S(0) * exp \bigg\{ \bigg(r \ - \ y - \frac{\sigma^2}{2} \bigg) \ * \ t_{1} \bigg\} $$

Where y denotes convience yield which is unobservable. However the formula for a forward price can be used to retrieve y.

This simulation generates the fixings in between the start of the fixing period and the end of the fixing period. It is simple to compute the average fixing:

$$ a_{1} = \frac{S(t_{1})+ \ ... \ + S(t_{n})}{n} $$

where S is the fixing at each day of the fixing period (for each iteration) and n is the number of fixing periods.

Methods for Lookback options are discussed here.

For education, many universities have Bloomberg. You will get quite reliable values for all of the products you mentioned by using the available pricers.

A related question may be how you get trade ideas for these options without knowing what they are worth (or how they are priced).

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  • $\begingroup$ Well written. Lot of useful information here, would look at it carefully. Thanks. $\endgroup$
    – user59094
    Sep 24, 2021 at 23:44
  • $\begingroup$ For the last part of your answer : Yes you’re right I can’t price them. I just thinking of it as ideas, of course little expectations. $\endgroup$
    – user59094
    Sep 24, 2021 at 23:51
  • $\begingroup$ E.g is a bull turbo warrant at exchanges, but with 4 changes: 1. A new must touch barrier above is added 2. Instant payout for profit if the new barrier is breached. 3. Instant payout for loss if the knockout level is breached 4. Instant payout for loss if neither barrier is breached(at expiry). Now of course something like this most would not find interesting. But I do find it interesting to know how those 4 changes would affect it’s cost. In real life I guess it is most probably a useless idea. I should have used the word ideas instead of trading ideas. Thanks again for that answer. $\endgroup$
    – user59094
    Sep 25, 2021 at 0:15
  • $\begingroup$ Turbo warrants are just barrier options. You cannot lose money as they just expire worthless, 3 and 4 don't apply. No matter what idea you have, you can price almost everything with existing libraries. Sometimes complex products may require complex models but most of the time, simpler models aren't that far from actual values and directionally usually OK. Choosing to pay on hit or expiry us also standard in pricers. $\endgroup$
    – AKdemy
    Sep 25, 2021 at 6:09
  • $\begingroup$ Alright, I get that. That’s good to know that almost everything can be priced. $\endgroup$
    – user59094
    Sep 25, 2021 at 9:42

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